And the Band Played On . . .

Yes the bland continued to play as the Titanic sunk. And what an act of humanity and bravery it was. Now, as the economy sinks, the financial analysts and economists of the world continue on as though the ship has righted itself and is now watertight. Why?

There could be many reasons why analysts soldier on with their bullish forecast in the present environment. First, they could be right! Oh my gosh, think of it, the credit crisis is over and now is the time to jump in. Maybe. But from credit delinquencies of all stripes and plunging home prices to rising unemployment there isn't much data to support that view.

Second, consider many of those interviewed in the financial press are managers of equity only mutual funds. Asking them where we are in the credit cycle and whether to invest in equities is like asking your wife if she is having an affair. These are questions which have only one answer, so why ask? Of course there could be a mutual fund manager who says: "Oh my GAWD! We are on the edge of financial armageddon, get out now!" He could also pick up his last paycheck on the way home.

Third, and more probable in my view is that there are so many variables, each with its own continually changing magnitude of importance, that almost no two people will look at even the same data and come to the same conclusions. Trying to forecast economic activity is somewhat akin to trying make long range weather forecasts: it simply isn't possible beyond a very short time horizon. So innate optimism and economic imperative rule the day. All is well, don't worry, be happy!

Let's Point Fingers !

What a mess: Imploding house prices, crumbling credit markets, plunging dollar, equity markets in disarray. It's been a very slow motion train wreck to this point. From Greenspahn's nearly free money policy of several years ago to Wall Street's creative Franken-financial instruments that enabled investment banks to make money hand over fist. A byproduct was millions of Americans have lived well beyond their means for years.

Now the day of reconing for Wall Street, and for Main Street has come. Who's to blame? We might have a shortage of credit, or food, or oil, but we certainly have no shortage of who to blame for this mess. First, let's start with Main Street. Who in their right mind mortgaged their house for expensive cars, luxurious vacations or even just dinner out every night? Apparently lots of people. Living beyond their means became an entitlement. And of course a plethora of "get rich quick schemes" developed with all of this easy money. Dot coms, house flipping, etc. But perhaps the biggest bubble of all was in the value of the US Dollar.

And how about banks of all stripes. They became enablers for all of this madness. Need a loan? To paraphrase what the Mexican said to Humphrey Bogart in Treasure of the Sierra Madre: "We don't need your stinking collateral senior". And so banks booked dollars by the gazillions as income, except it had a curious name: Negative amotization income. Meaning if the bank didn't actually recoup the cost of their capital then the bank took an increasing equity position in the borrower's house. OOPS! But then house prices started what appears to be a mulit-year descent and the rest will soon be history.

Who else to blame? Why the regulators, bureaucrats and politicians of course. And neither political party gets a pass here. Barney Frank, Democratic Chair of the House Fincancial Services Committee watched as all this developed. You might draw some solace (although not much) by noticing that NOW he sees the problem and will take action. And how about another Democratic Senator: Chris Dodd, the Senate Banking Committee chairman? He can now pile on with Frank. The list goes on at the White House. Did the previous Treasury Secretary, John Snow do anything? Well he was good at what his charter was: Cheer leading. And please, do not wake President Bush over this, he's too busy fooling around with his costly and unnecessary foreign adventures. His new Secretary of the Treasury, Hank Paulson will handle these distasteful issues. Wait a minute! Didn't Paulson formerly head up Goldman Sachs and weren't they partly responsible for all of this . . . . ?

Whirrrrrrrrrr

Yes, that whirring sound you hear is Gentle Ben at the Fed warming up the helicopters. And just in time! As inflation roars, and the dollar plummets the Fed now feels it must lower Fed Funds yet again. And while this is probably a necessity given the parlous state of world credit markets, it is nonetheless a horific medicine to administer when inflation is flexing its ugly muscles.

Consider that US farmers are cutting the size of herds because it now costs more to feed cattle and hogs than can be recouped from selling them. The short term effect of this will be to constrain beef and pork prices. But long term this will result in much higher meat prices to consumers. And of course this will be exacerbated by a falling dollar which will make US food exports more competitive in world markets. Good for the trade deficit, bad for US consumers which will soon have to pay much more for food of all types.

What to do? How to protect your wealth? Try FXE, an ETF which is really a Euro money market you can buy on the stock exchange. Or GLD, or SLV which are ETFs that hold gold and silver. Try a global bond fund, my preference is GIM and I have neither the space here nor the time to go into all the reasons I like this, but come up with one on your own. Not just bonds in these, but bonds denominated in stronger currencies. Yes, many of these have already had a good run ( fair disclosure: I am long all of these ), but with the helicopters gathering over head they may have quite a run yet.

Whatever you do, don't just sit there admiring the helicopters!